UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2013
OR
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to _____________
Commission File Number: 000-27816
REDWOOD MORTGAGE INVESTORS VIII,
a California Limited Partnership
(Exact name of registrant as specified in its charter)
California | 94-3158788 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
900 Veterans Blvd., Suite 500, Redwood City, CA | 94063 |
(Address of principal executive offices) | (Zip Code) |
(650) 365-5341
(Registrant's telephone number, including area code)
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report)
1
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
[X] YES [ ] NO
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] | Accelerated filer [ ] |
Non-accelerated filer [ ] (Do not check if a smaller reporting company) | Smaller reporting company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] YES [X] NO
2
Part I –FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Balance Sheets
March 31, 2013 (unaudited) and December 31, 2012 (audited)
($ in thousands)
ASSETS
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Cash and cash equivalents | $ | 17,646 | $ | 18,943 | ||||
Loans | ||||||||
Secured by deeds of trust | ||||||||
Principal balances | 60,308 | 60,870 | ||||||
Advances | 5,087 | 5,035 | ||||||
Accrued interest | 172 | 182 | ||||||
Unsecured | 100 | 108 | ||||||
Allowance for loan losses | (19,875 | ) | (19,815 | ) | ||||
Net loans | 45,792 | 46,380 | ||||||
Real estate owned, held as investment, net | 181,407 | 181,333 | ||||||
Other assets, net | 1,532 | 1,119 | ||||||
Total assets | $ | 246,377 | $ | 247,775 |
LIABILITIES AND CAPITAL
Liabilities | ||||||||
Mortgages payable | $ | 47,027 | $ | 47,293 | ||||
Accounts payable and accrued liabilities | 3,008 | 3,162 | ||||||
Payable to affiliate | 656 | 565 | ||||||
Total liabilities | 50,691 | 51,020 | ||||||
Capital | ||||||||
Partners’ capital | ||||||||
Limited partners’ capital, subject to redemption, net | 195,029 | 196,081 | ||||||
General partners’ capital (deficit), net | (1,030 | ) | (1,025 | ) | ||||
Total partners’ capital | 193,999 | 195,056 | ||||||
Non-controlling interest | 1,687 | 1,699 | ||||||
Total capital | 195,686 | 196,755 | ||||||
Total liabilities and capital | $ | 246,377 | $ | 247,775 |
The accompanying notes are an integral part of these consolidated financial statements.
3
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Operations
For the Three Months Ended March 31, 2013 and 2012
($ in thousands, except for per limited partner amounts)
(unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2013 | 2012 | |||||||
Revenues, net | ||||||||
Interest income | ||||||||
Loans | $ | 342 | $ | 323 | ||||
Imputed interest on formation loan | 93 | 52 | ||||||
Other interest income | — | 1 | ||||||
Total interest income | 435 | 376 | ||||||
Interest expense | ||||||||
Bank loan, secured | — | 281 | ||||||
Mortgages | 551 | 584 | ||||||
Amortization of discount on formation loan | 93 | 52 | ||||||
Other interest expense | — | 1 | ||||||
Total interest expense | 644 | 918 | ||||||
Net interest income/(expense) | (209 | ) | (542 | ) | ||||
Late fees | 3 | 7 | ||||||
Other | — | 3 | ||||||
Total revenues/(expense), net | (206 | ) | (532 | ) | ||||
Provision for loan losses | — | — | ||||||
Operating Expenses | ||||||||
Mortgage servicing fees | 153 | 180 | ||||||
Asset management fees | 192 | 226 | ||||||
Costs from Redwood Mortgage Corp. | 390 | 361 | ||||||
Professional services | 450 | 331 | ||||||
REO | ||||||||
Rental operations, net | (968 | ) | (805 | ) | ||||
Holding costs | 64 | 430 | ||||||
Loss/(gain) on disposal | — | (6 | ) | |||||
Other | 4 | 47 | ||||||
Total operating expenses | 285 | 764 | ||||||
Net income (loss) | $ | (491 | ) | $ | (1,296 | ) | ||
Net income (loss) | ||||||||
General partners (1%) | $ | (5 | ) | $ | (13 | ) | ||
Limited partners (99%) | (486 | ) | (1,283 | ) | ||||
$ | (491 | ) | $ | (1,296 | ) | |||
Net income (loss) per $1,000 invested by limited | ||||||||
partners for entire period | ||||||||
Where income is reinvested | $ | (2 | ) | $ | (6 | ) | ||
Where partner receives income in monthly distributions | $ | (2 | ) | $ | (5 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
4
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Changes in Partners’ Capital
For the Three Months Ended March 31, 2013
(in thousands) (unaudited)
Limited Partners | ||||||||||||||||
Capital | Unallocated Syndication Costs | Formation Loan | Capital, net | |||||||||||||
Balance, December 31, 2012 | $ | 204,026 | $ | (318 | ) | $ | (7,627 | ) | $ | 196,081 | ||||||
Net income (loss) | (486 | ) | — | — | (486 | ) | ||||||||||
Allocation of syndication costs | (87 | ) | 87 | — | — | |||||||||||
Withdrawals | (566 | ) | — | — | (566 | ) | ||||||||||
Balance, March 31, 2013 | $ | 202,887 | $ | (231 | ) | $ | (7,627 | ) | $ | 195,029 |
General Partners | ||||||||||||||||
Capital | Unallocated Syndication Costs | Capital, net | Total Partners’ Capital | |||||||||||||
Balance, December 31, 2012 | $ | (1,022 | ) | $ | (3 | ) | $ | (1,025 | ) | $ | 195,056 | |||||
Net income (loss) | (5 | ) | — | (5 | ) | (491 | ) | |||||||||
Allocation of syndication costs | (1 | ) | 1 | — | — | |||||||||||
Withdrawals | — | — | — | (566 | ) | |||||||||||
Balance, March 31, 2013 | $ | (1,028 | ) | $ | (2 | ) | $ | (1,030 | ) | $ | 193,999 |
The accompanying notes are an integral part of these consolidated financial statements.
5
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2013 and 2012
($ in thousands) (unaudited)
2013 | 2012 | |||||||
Cash flows from operating activities | ||||||||
Net income (loss) | $ | (491 | ) | $ | (1,296 | ) | ||
Adjustments to reconcile net income (loss) to | ||||||||
net cash provided by (used in) operating activities | ||||||||
Amortization of borrowings-related origination fees | 20 | 103 | ||||||
Imputed interest on formation loan | (93 | ) | (52 | ) | ||||
Amortization of discount on formation loan | 93 | 52 | ||||||
Provision for loan losses | — | — | ||||||
REO – depreciation, rental properties | 602 | 572 | ||||||
REO – depreciation, other properties | 6 | — | ||||||
REO – loss/(gain) on disposal | — | (6 | ) | |||||
REO – impairment loss | — | — | ||||||
Change in operating assets and liabilities | ||||||||
Accrued interest | 10 | 864 | ||||||
Advances on loans | (52 | ) | (192 | ) | ||||
Allowance for loan losses-recoveries | 60 | — | ||||||
Other assets | (433 | ) | (305 | ) | ||||
Accounts payable and accrued liabilities | (154 | ) | 542 | |||||
Payable to affiliate | 91 | (308 | ) | |||||
Net cash provided by (used in) operating activities | (341 | ) | (26 | ) | ||||
Cash flows from investing activities | ||||||||
Loans originated | — | (7 | ) | |||||
Principal collected on loans | 562 | 3,795 | ||||||
Unsecured loan originated | 8 | 9 | ||||||
Payments for development of real estate | (682 | ) | (322 | ) | ||||
Proceeds from disposition of real estate | — | 8,022 | ||||||
Net cash provided by (used in) investing activities | (112 | ) | 11,497 | |||||
Cash flows from financing activities | ||||||||
Payments on bank loan | — | (6,539 | ) | |||||
Payments on mortgages | (266 | ) | (671 | ) | ||||
Partners’ withdrawals | (566 | ) | (654 | ) | ||||
Increase/(decrease) in non-controlling interest | (12 | ) | (1,042 | ) | ||||
Net cash provided by (used in) financing activities | (844 | ) | (8,906 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (1,297 | ) | 2,565 | |||||
Cash and cash equivalents, January 1 | 18,943 | 4,200 | ||||||
Cash and cash equivalents, March 31 | $ | 17,646 | $ | 6,765 | ||||
Cash paid for interest | $ | 551 | $ | 865 |
The accompanying notes are an integral part of these consolidated financial statements.
6
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL
In the opinion of the general partners, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the consolidated financial information included therein. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the partnership’s Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission (SEC). The results of operations for the three month period ended March 31, 2013 are not necessarily indicative of the operating results to be expected for the full year.
Redwood Mortgage Investors VIII, a California Limited Partnership, (“RMI VIII” or the “partnership”) was organized in 1993. The general partners of the partnership are Redwood Mortgage Corp. (“RMC”) and its wholly-owned subsidiary, Gymno LLC (“Gymno”), a California limited liability company, and Michael R. Burwell (“Burwell”), an individual. The partnership was organized to engage in business as a mortgage lender for the primary purpose of making loans secured by deeds of trust on California real estate. Loans are being arranged and serviced by RMC. Michael Burwell is the president and majority shareholder (through his holdings and beneficial interests in certain trusts) of RMC. The general partners are solely responsible for partnership business, subject to the voting rights of the limited partners on specified matters. Any one of the general partners acting alone has the power and authority to act for and bind the partnership. The general partners are required to contribute to capital 1/10 of 1% of the aggregate capital contributions of the limited partners. As of March 31, 2013, the general partners had contributed capital in accordance with Section 4.1 of the partnership agreement.
The rights, duties and powers of the general and limited partners of the partnership are governed by the limited partnership agreement and Sections 15900 et seq. of the California Corporations Code.
The partnership completed its sixth offering stage in 2008. No additional offerings are contemplated at this time. Sales commissions owed to securities broker/dealers in conjunction with the offerings, are not paid directly out of the offering proceeds by the partnership. These commissions are paid by RMC as consideration for the exclusive right to originate loans for RMI VIII. To fund the payment of these commissions, during the offering periods, the partnership lent amounts to RMC to pay all sales commissions and amounts payable in connection with unsolicited orders to invest (formation loan).
On the mortgage loans originated for RMI VIII, RMC may collect loan brokerage commissions (points) limited to an amount not to exceed four percent per year of the total partnership assets. The loan brokerage commissions are paid by the borrowers and thus, are not an expense of the partnership. The proceeds from loan brokerage commissions and other fees earned are the source of funds for the repayment of the formation loans by RMC.
Profits and losses are allocated among the limited partners according to their respective capital accounts after one percent of profits and losses is allocated to the general partners, and are subject to subsequent adjustment as a result of quarterly and year-end accounting and reporting.
RMC, Gymno, and Burwell, as the general partners, are entitled to one percent of the profits and losses of RMI VIII. Beginning with calendar year 2010, and continuing until January 1, 2020, Gymno and RMC each assigned its right to one-third of one percent of profits and losses to Burwell in exchange for Burwell assuming one hundred percent of the general partners’ equity deficit.
A majority of the outstanding limited partnership interests may, without the permission of the general partners, vote to: (i) terminate the partnership, (ii) amend the limited partnership agreement, (iii) approve or disapprove the sale of all or substantially all of the assets of the partnership and (iv) remove or replace one or all of the general partners.
The approval of all the limited partners is required to elect a new general partner to continue the partnership business where there is no remaining general partner after a general partner ceases to be a general partner other than by removal.
Members should refer to the company's operating agreement for a more complete description of the provisions.
7
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 1 – ORGANIZATIONAL AND GENERAL (continued)
Income taxes – federal and state – are the obligation of the partners, if and when taxes apply, other than for the minimum annual California franchise tax paid by the partnership.
Formation loan
RMC financed the payments to broker-dealers by borrowing funds (“the formation loan”) from RMI VIII. The formation loan is non-interest bearing and is being repaid equally over an approximate ten-year period commencing the year after the close of a partnership offering. Interest has been imputed at the market rate of interest in effect in the years the offerings closed.
The formation loan is deducted from limited partners’ capital in the consolidated balance sheets. As payments are received from RMC, the formation loan’s balance outstanding and the deduction from capital are reduced.
If the general partners are removed and RMC is no longer receiving payments for services rendered, the formation loan is forgiven.
Commission and fees paid by borrowers to the general partners
Brokerage commissions, loan originations – the partnership agreement provides for RMC to collect a loan brokerage commission for fees in connection with the review, selection, evaluation, negotiation and extension of loans, that is expected to range from approximately 2% to 5% of the principal amount of each loan made during the year. Total loan brokerage commissions are limited to an amount not to exceed four percent of the total partnership assets per year. The loan brokerage commissions are paid by the borrowers and are not an expense of the partnership.
Other fees – the partnership agreement provides for RMC or Gymno to receive fees for processing, notary, document preparation, credit investigation, reconveyance, and other mortgage related fees. The amounts received are customary for comparable services in the geographical area where the property securing the loan is located, payable solely by the borrower and not by the partnership.
Syndication costs
The partnership bears its own syndication costs, other than certain sales commissions, including legal and accounting expenses, printing costs, selling expenses and filing fees. Syndication costs are charged monthly against partners’ capital and are allocated to individual partners consistent with the partnership agreement.
Withdrawals
In March 2009, in response to economic conditions, the dysfunction of the credit markets, the distress in the real estate markets, and the expected cash needs of the partnership, the partnership suspended capital liquidations, and is not accepting new liquidation requests until further notice.
Term of the partnership
The partnership is scheduled to terminate in 2032, unless sooner terminated as provided in the partnership agreement.
8
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The partnership’s consolidated financial statements include the accounts of the partnership, its wholly-owned subsidiaries, and its 72.5%-owned subsidiary. All significant intercompany transactions and balances have been eliminated in consolidation.
Reclassifications
Certain reclassifications, not affecting previously reported net income or total partner capital, have been made to the previously issued consolidated financial statements to conform to the current year presentation.
Management estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities, at the dates of the financial statements and the reported amounts of revenues and expenses during the reported periods. Such estimates relate principally to the determination of the allowance for loan losses, including the valuation of impaired loans, (which itself requires determining the fair value of the collateral), and the valuation of real estate held for sale and held as investment, at acquisition and subsequently. Actual results could differ significantly from these estimates.
Collateral fair values are reviewed quarterly and the protective equity for each loan is computed. As used herein, “protective equity” is the arithmetic difference between the fair value of the collateral, net of any senior liens, and the loan balance, where “loan balance” is the sum of the unpaid principal, advances and the recorded interest. This computation is done for each loan (whether impaired or performing), and while loans secured by collateral of similar property type are grouped, there is enough distinction and variation in the collateral that a loan-by-loan, collateral-by-collateral analysis is appropriate.
The fair value of the collateral is determined by exercise of judgment based on management’s experience informed by appraisals (by licensed appraisers), brokers’ opinion of values, and publicly available information on in-market transactions. In some years (notably 2009, 2010 and to a lesser extent 2011 and 2012) due to low levels of real estate transactions, and an increased number of transactions that were distressed (i.e., executed by an unwilling seller – often compelled by lenders or other claimants – and/or executed without broad exposure or with market exposure but with few, if any, resulting offers), more interpretation, judgment and interpolation/extrapolation within and across property types was required.
Appraisals of commercial real property generally present three approaches to estimating value: 1) market comparables or sales approach; 2) cost to replace and 3) capitalized cash flows or investment approach. These approaches may or may not result in a common, single value. The market-comparables approach may yield several different values depending on certain basic assumptions, such as, determining highest and best use (which may or may not be the current use); determining the condition (e.g. as-is, when-completed, or for land when-entitled); and determining the unit of value (e.g. as a series of individual unit sales or as a bulk disposition). In some prior years, as has been previously noted, the appraisal process was further complicated by the low real estate transaction volumes of which a very high percentage were considered to be distressed sales, as well as other poor market conditions.
9
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Management estimates (continued)
Management has the requisite familiarity with the markets the partnership lends in generally and of the collateral properties specifically to analyze sales-comparables and assess their suitability/applicability. Management is acquainted with market participants – investors, developers, brokers, lenders – that are useful, relevant secondary sources of data and information regarding valuation and valuation variability. These secondary sources may have familiarity with and perspectives on pending transactions, successful strategies to optimize value, and the history and details of specific properties – on and off the market – that enhance the process and analysis that is particularly and principally germane to establishing value in distressed markets and/or property types (such as land held for development and for units in a condominium conversion). Multiple inputs from different sources often collectively provide the best evidence of fair value. In these cases expected cash flows would be considered alongside other relevant information. Management’s analysis of these secondary sources, as well as the analysis of comparable sales, assists management in preparing its estimates regarding valuations, such as collateral fair value. However, such estimates are inherently imprecise and actual results could differ significantly from such estimates.
Cash and cash equivalents
The partnership considers all highly liquid financial instruments with maturities of three months or less at the time of purchase to be cash equivalents. Periodically, partnership cash balances in banks exceed federally insured limits.
Loans and interest income
Loans generally are stated at the unpaid principal balance (principal). Management has discretion to pay amounts (advances) to third parties on behalf of borrowers to protect the partnership’s interest in the loan. Advances include, but are not limited to, the payment of interest and principal on a senior lien to prevent foreclosure by the senior lien holder, property taxes, insurance premiums, and attorney fees. Advances generally are stated at the unpaid principal balance and accrue interest until repaid by the borrower.
The partnership may fund a specific loan origination net of an interest reserve to insure timely interest payments at the inception (one to two years) of the loan. As monthly interest payments become due, the partnership funds the payments into the affiliated trust account.
If based upon current information and events, it is probable the partnership will be unable to collect all amounts due according to the contractual terms of the loan agreement, then a loan may be designated as impaired. Impaired loans are included in management’s periodic analysis of recoverability. If a valuation allowance had been established on an impaired loan, any subsequent payments on impaired loans are applied to late fees and then to reduce first the accrued interest, then advances, and then unpaid principal.
From time to time, the partnership negotiates and enters into loan modifications with borrowers whose loans are delinquent. If the loan modification results in a significant reduction in the cash flow compared to the original note, the modification is deemed a troubled debt restructuring and a loss is recognized. In the normal course of the partnership’s operations, loans that mature may be renewed at then current market rates and terms for new loans. Such renewals are not designated as impaired, unless the matured loan was previously designated as impaired.
10
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans and interest income (continued)
Interest is accrued daily based on the unpaid principal balance of the loans. An impaired loan continues to accrue as long as the loan is in the process of collection and is considered to be well-secured. Loans are placed on non-accrual status at the earlier of management’s determination that the primary source of repayment will come from the foreclosure and subsequent sale of the collateral securing the loan (which usually occurs when a notice of sale is filed) or when the loan is no longer considered well-secured. When a loan is placed on non-accrual status, the accrual of interest is discontinued; however, previously recorded interest is not reversed. A loan may return to accrual status when all delinquent interest and principal payments become current in accordance with the terms of the loan agreement.
Allowance for loan losses
Loans and the related accrued interest and advances are analyzed on a periodic basis for ultimate recoverability. Delinquencies are identified and followed as part of the loan system. Delinquencies are determined based upon contractual terms. For impaired loans, a provision is made for loan losses to adjust the allowance for loan losses to an amount considered by management to be adequate, with due consideration to collateral values, such that the net carrying amount (unpaid principal balance, plus advances, plus accrued interest less the specific allowance) is reduced to the present value of future cash flows discounted at the loan’s effective interest rate, or, if a loan is collateral dependent, to the estimated fair value of the related collateral net of any senior loans, net of any costs to sell in arriving at net realizable value if planned disposition of the asset securing a loan is by way of sale.
The fair value estimates are derived from information available in the real estate markets including similar property, and may require the experience and judgment of third parties such as commercial real estate appraisers and brokers.
Loans determined not to be individually impaired are grouped by the property type of the underlying collateral, and for each loan and for the total by property type, the amount of protective equity or amount of exposure to loss (i.e., the dollar amount of the deficiency of the fair value of the underlying collateral to the loan balance) is computed.
Based on its knowledge of the borrowers and their historical (and expected) performance, and the exposure to loss as indicated in the analysis, management estimates an appropriate reserve by property type for probable credit losses in the portfolio. Because the partnership is an asset-based lender, except as to owner-occupied residences, and because specific regions, neighborhoods and even properties within the same neighborhoods, vary significantly as to real estate values and transaction activity, general market trends, which may be indicative of a change in the risk of a loss, are secondary to the condition of the property, the property type and the neighborhood/region in which the property is located, and do not enter substantially into the determination of the amount of the non-specific (i.e. general) reserves.
The partnership charges off uncollectible loans and related receivables directly to the allowance account once it is determined the full amount is not collectible.
11
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real estate owned (REO) held for sale
REO, held for sale includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is being marketed for sale. REO, held for sale is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s net realizable value, which is the fair value less estimated costs to sell, as applicable. Any excess of the recorded investment in the loan over the net realizable value is charged against the allowance for loan losses. The fair value estimates are derived from information available in the real estate markets including similar property, and often require the experience and judgment of third parties such as commercial real estate appraisers and brokers. The estimates figure materially in calculating the value of the property at acquisition, the level of charge to the allowance for loan losses and any subsequent valuation reserves. After acquisition, costs incurred relating to the development and improvement of property are capitalized to the extent they do not cause the recorded value to exceed the net realizable value, whereas costs relating to holding and disposition of the property are expensed as incurred. After acquisition, REO, held for sale is analyzed periodically for changes in fair values and any subsequent write down is charged to operating expenses. Any recovery in the fair value subsequent to such a write down is recorded – not to exceed the net realizable value at acquisition – as an offset to operating expenses. Gains or losses on sale of the property are recorded as an operating expense. Recognition of gains on the sale of real estate is dependent upon the transaction meeting certain criteria related to the nature of the property and the terms of the sale including potential seller financing.
Real estate owned (REO), held as investment, net
REO, held as investment, net includes real estate acquired in full or partial settlement of loan obligations generally through foreclosure that is not being marketed for sale and is either being operated, such as rental properties; is being managed through the development process, including obtaining appropriate and necessary entitlements, permits and construction; or are idle properties awaiting more favorable market conditions. REO, held as investment, net is recorded at acquisition at the lower of the recorded investment in the loan, plus any senior indebtedness, or at the property’s estimated fair value, net. After acquisition, costs incurred relating to the development and improvement of the property are capitalized, whereas costs relating to operating or holding the property are expensed. Subsequent to acquisition, management periodically compares the carrying value of real estate to expected undiscounted future cash flows for the purpose of assessing the recoverability of the recorded amounts. If the carrying value exceeds future undiscounted cash flows, the assets are reduced to estimated fair value.
Rental income
Residential rental lease lengths generally range from month to month up to one year, and commercial rental lease lengths generally range from five to ten years, with rental income recognized when earned in accordance with the lease agreement.
Depreciation
Real estate owned held as investment that is being operated is depreciated on a straight-line basis over the estimated useful life of the property once the asset is placed in service.
Net income per $1,000 invested
Amounts reflected in the statements of income as net income per $1,000 invested by limited partners for the entire period are amounts allocated to limited partners who held their investment throughout the period and have either elected to leave their profits to compound or elected to receive periodic distributions of their net income. Individual income is allocated each month based on the limited partners’ pro rata share of partners’ capital. Because the net income percentage varies from month to month, amounts per $1,000 will vary for those individuals who made or withdrew investments during the period, or selected other options.
12
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently issued accounting pronouncements
There are no recently effective or issued but not yet effective accounting pronouncements which would have a material effect on the company’s reported financial position or results of operations.
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES
The general partners are entitled to one percent of the profits and losses, which amounted to approximately $(5,000) and $(13,000) for the three months ended March 31, 2013 and 2012, respectively.
Formation loan
Formation loan transactions are presented in the following table at March 31, 2013 ($ in thousands).
Formation loan made | $ | 22,567 | ||
Unamortized discount on formation loan | (2,130 | ) | ||
Formation loan made, net | 20,437 | |||
Repayments to date | (14,297 | ) | ||
Early withdrawal penalties applied | (643 | ) | ||
Formation loan, net | 5,497 | |||
Unamortized discount on formation loan | 2,130 | |||
Balance, March 31, 2013 | $ | 7,627 |
An estimated amount of imputed interest is recorded for any outstanding offerings. During the three months ended March 31, 2013 and 2012, $93,000 and $52,000, respectively, was recorded related to imputed interest.
The proceeds from loan brokerage commissions and other fees earned are the source of funds for the repayment of the formation loans by RMC.
RMC acts as the broker in originating mortgage loans for RMI VIII. The corresponding brokerage commissions paid by borrowers from mortgage loans made by these funds are the primary source of cash used to repay the formation loans. RMI VIII was prohibited by its lending banks from originating new loans under the terms of an Amended and Restated Loan Agreement dated October 2010, and a preceding forbearance agreement that was in effect in the fourth quarter of 2009, until the bank loan was repaid in full, in September 2012. The amended loan and forbearance agreements were the result of a technical (i.e. not a payment default) covenant default under the original loan. As a result, RMC was deprived of the opportunity to receive brokerage commissions on loans by RMI VIII for the period from the fourth quarter of 2009 continuing through September 30, 2012, a period of almost three years. During that period, despite receiving no loan brokerage commissions, RMC continued to make the annual formation loan payments of approximately $1.8 million per year (or $5.4 million for the three years) from its own cash reserves that existed as of the date of the forbearance agreement. RMC believes it would have had a reasonable argument that the annual formation loan payments should be suspended until such time as lending by RMI VIII was permitted to resume and brokerage commissions could be earned, but RMC elected not to make such a proposal and, instead, continued to make annual formation loan payments due to concerns that the lending banks would view nonpayment of the formation loan as another technical loan default that might have led to a “distressed sale” liquidation of RMI VIII’s assets, resulting in substantial loss of limited partners’ capital.
As the bank loan was fully repaid as of September 2012, RMC has temporarily suspended annual formation loan payments, beginning with the payment due December 31, 2012, for the three-year period then beginning, which is a period commensurate with the period during which lending by RMI VIII was prohibited and RMC was deprived of loan brokerage commissions.
The following commissions and/or fees are paid by the borrowers to the general partners and their affiliates and are not an expense of the partnership.
13
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 3 – GENERAL PARTNERS AND OTHER RELATED PARTIES (continued)
Brokerage commissions, loan originations
There were no loan brokerage commissions paid by the borrowers in the three months ended March 31, 2013 and 2012.
Other fees
Other fees totaled $3,608 and $315 for the three month periods ended March 31, 2013 and 2012, respectively.
The following commissions and fees are paid by the partnership to RMC.
Mortgage servicing fees
RMC may earn mortgage servicing fees of up to 1.5% annually of the unpaid principal of the loan portfolio or such lesser amount as is reasonable and customary in the geographic area where the property securing the mortgage is located from RMI VIII. Historically, RMC charged one percent annually, and at times waived additional amounts to improve the partnership’s earnings. Such fee waivers were not made for the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor were such waivers made in order to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion.
Mortgage servicing fees paid to RMC by the partnership are presented in the following table for the three months ended March 31, ($ in thousands).
2013 | 2012 | |||||||
Chargeable by RMC | $ | 230 | $ | 270 | ||||
Waived by RMC | (77 | ) | (90 | ) | ||||
Charged | $ | 153 | $ | 180 |
Asset management fees
The general partners receive monthly fees for managing the partnership’s loan portfolio and operations of up to 1/32 of 1% of the “net asset value” (3/8 of 1% annually). At times, the general partners have charged less than the maximum allowable rate to enhance the partnership’s earnings. Such fee waivers were not made with the purpose of providing the partnership with sufficient funds to satisfy withdrawal requests, nor to meet any required level of distributions, as the partnership has no such required level of distributions. RMC does not use any specific criteria in determining the exact amount of fees, if any, to be waived. The decision to waive fees and the amount, if any, to be waived, is made by RMC in its sole discretion.
Asset management fees for the three months ended March 31, 2013 and 2012 were $192,000 and $226,000, respectively. No asset management fees were waived during any period reported.
Costs from Redwood Mortgage Corp.
RMC is reimbursed by the partnership for operating expenses incurred on behalf of the partnership, including without limitation, accounting and audit fees, legal fees and expenses, postage and preparation of reports to limited partners, and out-of-pocket general and administration expenses. The decision to request reimbursement of any qualifying charges is made by RMC in its sole discretion. During the three months ended March 31, 2013 and 2012, operating expenses totaling $390,000 and $361,000, respectively, were reimbursed to RMC. To the extent some operating expenses incurred on behalf of RMI VIII were not charged by RMC, the financial position and results of operations for the partnership would be different.
14
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS
The partnership generally funds loans with a fixed interest rate and a five-year term. As of March 31, 2013, approximately 45% of the partnership’s loans (representing 51% of the aggregate principal balance of the partnership’s loan portfolio) have a five year term or less from loan inception. The remaining loans have terms longer than five years.
As of March 31, 2013, approximately 42% of the loans outstanding (representing 84% of the aggregate principal balance of the partnership’s loan portfolio) provide for monthly payments of interest only, with the principal due in full at maturity. The remaining loans require monthly payments of principal and interest, typically calculated on a 30 year amortization, with the remaining principal balance due at maturity.
The partnership makes construction and rehabilitation loans which are not fully disbursed at loan inception. The partnership has approved the borrowers up to a maximum loan balance; however, disbursements are made periodically during completion phases of the construction or rehabilitation or at such other times as required under the loan documents and would be funded from available cash balances and future cash receipts. The partnership does not maintain a separate cash reserve to hold the undisbursed obligations, which are intended to be funded. As of March 31, 2013, there was one such loan; however, the borrower is in default negating any funding obligation.
Loans unpaid principal balance (principal)
Secured loan transactions are summarized in the following table for the three months ended March 31, ($ in thousands).
2013 | 2012 | |||||||
Principal, January 1 | $ | 60,870 | $ | 73,386 | ||||
Loans funded or acquired | — | 7 | ||||||
Principal collected | (562 | ) | (3,795 | ) | ||||
Principal, March 31 | $ | 60,308 | $ | 69,598 |
During the three months ended March 31, 2013 and 2012, the partnership renewed two and one loans, respectively, with an aggregate principal of approximately $353,000 and $120,000, respectively that were not included in the activity shown on the table above.
15
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Loan characteristics
Secured loans had the characteristics presented in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Number of secured loans | 38 | 39 | ||||||
Secured loans – principal | $ | 60,308 | $ | 60,870 | ||||
Secured loans – lowest interest rate (fixed) | 3.00 | % | 3.00 | % | ||||
Secured loans – highest interest rate (fixed) | 12.00 | % | 12.00 | % | ||||
Average secured loan – principal | $ | 1,587 | $ | 1,561 | ||||
Average principal as percent of total principal | 2.63 | % | 2.56 | % | ||||
Average principal as percent of partners’ capital | 0.82 | % | 0.80 | % | ||||
Average principal as percent of total assets | 0.64 | % | 0.63 | % | ||||
Largest secured loan – principal | $ | 16,697 | $ | 16,697 | ||||
Largest principal as percent of total principal | 27.69 | % | 27.43 | % | ||||
Largest principal as percent of partners’ capital | 8.61 | % | 8.56 | % | ||||
Largest principal as percent of total assets | 6.78 | % | 6.74 | % | ||||
Smallest secured loan – principal | $ | 87 | $ | 87 | ||||
Smallest principal as percent of total principal | 0.14 | % | 0.14 | % | ||||
Smallest principal as percent of partners’ capital | 0.04 | % | 0.04 | % | ||||
Smallest principal as percent of total assets | 0.04 | % | 0.04 | % | ||||
Number of counties where security is located (all California) | 19 | 19 | ||||||
Largest percentage of principal in one county | 46.61 | % | 46.18 | % | ||||
Number of secured loans in foreclosure status | 9 | 6 | ||||||
Secured loans in foreclosure – principal | $ | 19,607 | $ | 1,910 | ||||
Number of secured loans with an interest reserve | — | — | ||||||
Interest reserves | $ | — | $ | — |
As of March 31, 2013, the partnership’s largest loan, in the unpaid principal balance of $16,697,000 (representing 27.69% of outstanding secured loans and 6.78% of partnership assets) has an interest rate of 10.00% and is secured by 9 units in a condominium complex located in San Francisco County, California. This loan matured February 1, 2011. The partnership is working with the borrower regarding the disposition of the remaining units.
Larger loans sometimes increase above 10% of the secured loan portfolio or partnership assets as these amounts decrease due to limited partner withdrawals and loan payoffs and due to restructuring of existing loans.
16
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Distribution of loans within California
Secured loans are distributed within California as summarized in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
San Francisco | 6 | $ | 28,115 | 47 | % | 6 | $ | 28,115 | 46 | % | ||||
San Francisco Bay Area (1) | 15 | 25,147 | 42 | 16 | 25,688 | 42 | ||||||||
Northern California (1) | 6 | 3,097 | 5 | 6 | 3,110 | 5 | ||||||||
Southern California | 11 | 3,949 | 6 | 11 | 3,957 | 7 | ||||||||
Total secured loans | 38 | $ | 60,308 | 100 | % | 39 | $ | 60,870 | 100 | % |
(1) | Excludes line(s) above |
Lien position
At funding secured loans had the following lien positions and are presented in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
First trust deeds | 16 | $ | 33,310 | 56 | % | 17 | $ | 33,785 | 56 | % | ||||
Second trust deeds | 21 | 26,703 | 44 | 21 | 26,789 | 44 | ||||||||
Third trust deeds | 1 | 295 | — | 1 | 296 | — | ||||||||
Total secured loans | 38 | 60,308 | 100 | % | 39 | 60,870 | 100 | % | ||||||
Liens due other lenders at loan closing | 80,875 | 80,875 | ||||||||||||
Total debt | $ | 141,183 | $ | 141,745 | ||||||||||
Appraised property value at loan closing | $ | 198,652 | $ | 199,392 | ||||||||||
Percent of total debt to appraised | ||||||||||||||
values (LTV) at loan closing (1) | 71.07 | % | 71.10 | % |
(1) | Based on appraised values and liens due other lenders at loan closing. The loan to value computation does not take into account subsequent increases or decreases in security property values following the loan closing nor does it include decreases or increases of the amount owing on senior liens to other lenders by payments or interest accruals, if any. Property values likely have changed, particularly over the last four years, and the portfolio’s current loan to value ratio likely is higher than this historical ratio. |
17
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Property type
Secured loans summarized by property type are presented in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||||
Loans | Principal | Percent | Loans | Principal | Percent | |||||||||
Single family | 30 | $ | 45,745 | 76 | % | 31 | $ | 46,295 | 76 | % | ||||
Multi-family | 2 | 2,556 | 4 | 2 | 2,557 | 4 | ||||||||
Commercial | 5 | 11,469 | 19 | 5 | 11,479 | 19 | ||||||||
Land | 1 | 538 | 1 | 1 | 539 | 1 | ||||||||
Total secured loans | 38 | $ | 60,308 | 100 | % | 39 | $ | 60,870 | 100 | % |
Single family properties include owner-occupied and non-owner occupied single family homes (1-4 unit residential buildings), condominium units, townhouses, and condominium complexes. From time to time, loan originations in one sector or property type become more active due to prevailing market conditions. The current concentration of the partnership’s loan portfolio in condominium properties may pose additional or increased risks. Recovery of the condominium sector of the real estate market is generally expected to lag behind that of single-family residences. In addition, availability of financing for condominium properties has been, and will likely continue to be, constricted and more difficult to obtain than other property types. As of March 31, 2013 and December 31, 2012, $36,791,000 and $36,855,000, respectively, of the partnership’s loans were secured by condominium properties.
Condominiums may create unique risks for the partnership that are not present for loans made on other types of properties. In the case of condominiums, a board of managers generally has discretion to make decisions affecting the condominium building, including regarding assessments to be paid by the unit owners, insurance to be maintained on the building, and the maintenance of that building, which may have an impact on the partnership loans that are secured by such condominium property.
The partnership may have less flexibility in foreclosing on the collateral for a loan secured by condominiums upon a default by the borrower. Among other things, the partnership must consider the governing documents of the homeowners association and the state and local laws applicable to condominium units, which may require an owner to obtain a public report prior to the sale of the units.
Scheduled maturities
Secured loans are scheduled to mature as presented in the following table ($ in thousands).
Scheduled maturities at March 31, 2013 | Loans | Principal | Percent | ||||
2013 | 6 | $ | 1,485 | 3 | % | ||
2014 | 3 | 2,565 | 4 | ||||
2015 | 8 | 14,018 | 23 | ||||
2016 | 2 | 3,198 | 5 | ||||
2017 | 4 | 1,403 | 2 | ||||
Thereafter | 2 | 1,462 | 3 | ||||
Total future maturities | 25 | 24,131 | 40 | ||||
Matured at March 31, 2013 | 13 | 36,177 | 60 | ||||
Total secured loans | 38 | $ | 60,308 | 100 | % |
18
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Scheduled maturities (continued)
It is the partnership’s experience loans may be repaid or refinanced before, at or after the contractual maturity date. For matured loans, the partnership may continue to accept payments while pursuing collection of amounts owed from borrowers. Therefore, the above tabulation for scheduled maturities is not a forecast of future cash receipts.
The partnership reports maturity data based upon the most recent contractual agreement with the borrower. The table above includes two loans with an aggregate principal of $353,000 which are renewals.
Matured loans
Secured loans past maturity are summarized in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Number of loans (2) (3) | 13 | 14 | ||||||
Principal | $ | 36,177 | $ | 36,486 | ||||
Advances | 5,062 | 5,014 | ||||||
Accrued interest | 63 | 61 | ||||||
Loan balance | $ | 41,302 | $ | 41,561 | ||||
Percent of principal | 60 | % | 60 | % |
(2) | The secured loans past maturity include 12 loans as of March 31, 2013 and December 31, 2012, also included in the secured loans in non-accrual status. |
(3) | The secured loans past maturity include 11 and 10 loans as of March 31, 2013 and December 31, 2012, respectively, also included in the secured loans delinquency. |
19
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Delinquency
Secured loans summarized by payment delinquency are presented in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Past due | ||||||||
30-89 days | $ | 359 | $ | 783 | ||||
90-179 days | 87 | 2,062 | ||||||
180 or more days | 20,694 | 19,033 | ||||||
Total past due | 21,140 | 21,878 | ||||||
Current | 39,168 | 38,992 | ||||||
Total secured loans | $ | 60,308 | $ | 60,870 |
At March 31, 2013, and December 31, 2012 the partnership had the same six workout agreements in effect with an aggregate principal of $20,072,000 and $20,081,000, respectively. Of the six borrowers, four, with an aggregate principal of $2,959,000 and $2,967,000 at March 31, 2013 and December 31, 2012, respectively, had made all required payments under the workout agreements and the loans were included in the above table as current. All of the loans with a workout agreement in effect were designated impaired.
Interest income accrued on loans contractually past due 90 days or more as to principal or interest payments during the three months ended March 31, 2013 and 2012 was $0. Accrued interest on loans contractually past due 90 days or more as to principal or interest payments at March 31, 2013 and December 31, 2012 was $14,000.
Loans in non-accrual status
Secured loans in nonaccrual status are summarized in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Secured loans in nonaccrual status | ||||||||
Number of loans | 19 | 18 | ||||||
Principal | $ | 43,004 | $ | 43,352 | ||||
Advances | 5,081 | 5,028 | ||||||
Accrued interest | 14 | 11 | ||||||
Loan balance | $ | 48,099 | $ | 48,391 | ||||
Foregone interest | $ | 710 | $ | 3,255 |
At March 31, 2013 there were no loans and at December 31, 2012, there was one loan with a loan balance of $99,000 that was contractually 90 or more days past due as to principal or interest and not in non-accrual status.
20
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Impaired Loans
Impaired loans had the balances shown and the associated allowance for loan losses presented in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Principal | $ | 45,522 | $ | 45,964 | ||||
Recorded investment (5) | $ | 50,664 | $ | 51,054 | ||||
Impaired loans without allowance | $ | 9,243 | $ | 9,611 | ||||
Impaired loans with allowance | $ | 41,421 | $ | 41,443 | ||||
Allowance for loan losses, impaired loans | $ | 19,560 | $ | 19,560 |
(5) | Recorded investment is the sum of principal, advances, and interest accrued for financial reporting purposes. |
Impaired loans had the average balances and interest income recognized and received in cash as presented in the following table ($ in thousands).
March 31, | December 31, | |||||||
2013 | 2012 | |||||||
Average recorded investment | $ | 50,859 | $ | 66,898 | ||||
Interest income recognized | $ | 34 | $ | 195 | ||||
Interest income received in cash | $ | 93 | $ | 612 |
Modifications and troubled debt restructurings
During the three months ended March 31, 2013 the partnership had not modified any loans and the six modified loans with an aggregate principal of $22,702,000 as of December 31, 2012 were in effect.
Allowance for loan losses
Activity in the allowance for loan losses is presented in the following table for the three months ended March 31 ($ in thousands).
2013 | 2012 | |||||||
Balance, January 1 | $ | 19,815 | $ | 22,035 | ||||
Provision for loan losses | — | — | ||||||
Charge-offs, net | ||||||||
Charge-offs | — | — | ||||||
Recoveries | 60 | — | ||||||
Charge-offs, net | 60 | — | ||||||
Balance, March 31 | $ | 19,875 | $ | 22,035 | ||||
Ratio of charge-offs, net during the period to average | ||||||||
secured loans outstanding during the period | 0.10 | % | — | % |
21
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 4 – LOANS (continued)
Allowance for loan losses (continued)
Allowance for loan losses applicable to secured loans (by property type) and the percentage of principal (by property type) are presented in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||
Amount | Percent | Amount | Percent | |||||||||
Allowance for loan losses | ||||||||||||
Secured loans by property type | ||||||||||||
Single family | $ | 19,315 | 76 | % | $ | 19,255 | 76 | % | ||||
Multi-family | 60 | 4 | 60 | 4 | ||||||||
Commercial | 490 | 19 | 490 | 19 | ||||||||
Land | 10 | 1 | 10 | 1 | ||||||||
Total for secured loans | $ | 19,875 | 100 | % | $ | 19,815 | 100 | % | ||||
Unsecured loans | $ | — | 100 | % | $ | — | 100 | % | ||||
Total allowance for loan losses | $ | 19,875 | 100 | % | $ | 19,815 | 100 | % |
NOTE 5 – REAL ESTATE OWNED (REO)
For REO, held as investment, the activity in net book value (NBV) and changes in the impairment reserves are summarized in the following table for the three months ended March 31 ($ in thousands).
NBV | Accumulated Depreciation | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Balance, January 1 | $ | 181,333 | $ | 161,402 | $ | 5,926 | $ | 3,594 | ||||||||
Dispositions | — | 7 | — | (7 | ) | |||||||||||
Improvements/betterments | 682 | 322 | — | — | ||||||||||||
Depreciation | (608 | ) | (572 | ) | 608 | 572 | ||||||||||
Balance, March 31 | $ | 181,407 | $ | 161,159 | $ | 6,534 | $ | 4,159 |
REO, held as investment, summarized by property type is presented in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||
Properties | NBV | Properties | NBV | |||||||
Property type | ||||||||||
Residential | ||||||||||
Single family (1) | 4 | $ | 14,653 | 4 | $ | 14,624 | ||||
Apartments | 1 | 377 | 1 | 376 | ||||||
Condominiums (2) | 4 | 68,169 | 4 | 68,448 | ||||||
Fractured Condominiums (3) | 10 | 72,043 | 10 | 72,292 | ||||||
Commercial (4) | 4 | 21,255 | 4 | 20,683 | ||||||
Land (5) | 2 | 4,910 | 2 | 4,910 | ||||||
Total REO, held as investment, net | 25 | $ | 181,407 | 25 | $ | 181,333 |
22
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
(1) Properties of note at March 31, 2013 include.
a) A property under construction consisting of two condominium units, with a carrying value of $5,034,000 and cost to complete of approximately $904,000.
b) A property consisting of 7 remaining (of 13 original) tenants-in-common units, with a book value of approximately $6,400,000 and cost to complete of approximately $800,000. In April 2013 one of the units was sold at its carrying value.
Both properties are located in San Francisco County.
(2) Includes units in condominium complexes wholly owned by the partnership.
(3) Includes units in condominium complexes partially owned by the partnership.
(4) Includes one development property located in Los Angeles County, presently zoned and entitled as commercial, being developed and re-entitled to residential.
(5) Includes at March 31, 2013 and December 31, 2012, approximately 12 acres located in Stanislaus County zoned commercial, and 13 acres located in Marin County, presently zoned residential.
REO, held as investment, summarized by geographic area is presented in the following table, ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||||
Non-Rental | Rental | Non-Rental | Rental | |||||||||||
No. | NBV | No. | NBV | No. | NBV | No. | NBV | |||||||
San Francisco | 2 | $ | 11,434 | 5 | $ | 18,371 | 2 | $ | 11,398 | 5 | $ | 17,962 | ||
San Francisco Bay Area (6) | 1 | 1,210 | 7 | 22,482 | 1 | 1,210 | 7 | 22,553 | ||||||
Northern California (6) | 2 | 5,329 | 5 | 45,320 | 2 | 5,335 | 5 | 45,480 | ||||||
Southern California | 1 | 8,956 | 2 | 68,305 | 1 | 8,824 | 2 | 68,571 | ||||||
Total REO Held as investment | 6 | $ | 26,929 | 19 | $ | 154,478 | 6 | $ | 26,767 | 19 | $ | 154,566 |
(6) Excluding line(s) above.
Rental properties summarized by property type is presented in the following table ($ in thousands).
March 31, 2013 | December 31, 2012 | |||||||||||||||||||||||
Property type | Units | Properties | NBV | Units | Properties | NBV | ||||||||||||||||||
Residential | ||||||||||||||||||||||||
Single family | 1 | 1 | $ | 1,590 | 1 | 1 | $ | 1,592 | ||||||||||||||||
Apartments | 8 | 1 | 377 | 8 | 1 | 376 | ||||||||||||||||||
Condominiums (7) | 220 | 4 | 68,169 | 220 | 4 | 68,447 | ||||||||||||||||||
Fractured Condominiums (8) | 440 | 10 | 72,043 | 440 | 10 | 72,292 | ||||||||||||||||||
Commercial | 3 | 3 | 12,299 | 3 | 3 | 11,859 | ||||||||||||||||||
Total rental properties | 672 | 19 | $ | 154,478 | 672 | 19 | $ | 154,566 |
(7) Includes units in condominium complexes wholly-owned by the partnership.
(8) Includes units in condominium complexes where some units had been sold prior to the partnership’s acquisition.
23
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 5 – REAL ESTATE OWNED (REO) (continued)
The earnings/(loss) from rental operations of the real estate owned, held as investment is presented in the following table for the three months ended March 31 ($ in thousands).
2013 | 2012 | |||||||
Rental income | $ | 2,791 | $ | 2,918 | ||||
Operating expenses | ||||||||
Administration and payroll | 346 | 392 | ||||||
Homeowner association fees | 201 | 160 | ||||||
Receiver fees | 46 | 73 | ||||||
Utilities and maintenance | 275 | 327 | ||||||
Advertising and promotions | 31 | 34 | ||||||
Property taxes | 275 | 462 | ||||||
Other | 47 | 93 | ||||||
Total operating expenses | 1,221 | 1,541 | ||||||
Net operating income | 1,570 | 1,377 | ||||||
Depreciation | 602 | 572 | ||||||
Rental operations, net | $ | 968 | $ | 805 |
Interest expense on the mortgages securing the rental properties was $551,000 and $582,000 for the three months ended March 31, 2013 and 2012, respectively.
NOTE 6 – MORTGAGES PAYABLE
Mortgages payable transactions are summarized in the following table for the three months ended March 31, ($ in thousands).
2013 | 2012 | |||||||
Principal, January 1 | $ | 47,293 | $ | 43,681 | ||||
New mortgages taken | — | — | ||||||
Mortgages assumed on acquisition of REO | — | — | ||||||
Principal repaid | (266 | ) | (671 | ) | ||||
Principal, March 31 | $ | 47,027 | $ | 43,010 |
24
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 6 – MORTGAGES PAYABLE (continued)
Mortgages payable are summarized in the following table (mortgage balance $ in thousands).
March 31, | December 31, | |||||||
Lender | 2013 | 2012 | ||||||
NorthMarq Capital – Secured by a condominium complex, | $ | 18,497 | $ | 18,607 | ||||
located in Los Angeles County | ||||||||
Interest rate (2.93%) varies monthly (LIBOR plus 2.73%) | ||||||||
Monthly payment (1) (2) $121,904 matures July 1, 2015 | ||||||||
East West Bank – Secured by a fractured condominium project | 13,552 | 13,578 | ||||||
located in Sacramento County | ||||||||
Interest rate varies monthly (greater of Prime plus 1% or 5.50%) | ||||||||
Monthly payment (2) $78,283 matures June 1, 2017 | ||||||||
Business Partners – Secured by a commercial property located | 7,007 | 7,100 | ||||||
in San Francisco County | ||||||||
Interest rate varies monthly (greater of 5-year Treasuries | ||||||||
plus 2.33% or 6.53%) | ||||||||
Monthly payment (1) (2)$78,802 matures May 1, 2015 | ||||||||
Chase Bank – Secured by a condominium complex | 5,111 | 5,136 | ||||||
located in Contra Costa County | ||||||||
Interest rate variable (fixed until September 1, 2017 at 3.52%) | ||||||||
Monthly payment $23,228 matures September 1, 2042 | ||||||||
First National Bank of Northern California – Secured by eight | 2,172 | 2,179 | ||||||
condominium units located in San Francisco County | ||||||||
Interest rate varies monthly (greater of Prime plus 2.35% or 5.70%) | ||||||||
Monthly payment (2) $12,856 matures November 1, 2016 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 362 | 365 | ||||||
San Francisco County | ||||||||
Interest rate (2.88%) varies annually (LIBOR plus 2.75%) | ||||||||
Monthly payment $2,014 matures October 1, 2032 | ||||||||
Wells Fargo Bank – Secured by a condominium unit located in | 326 | 328 | ||||||
San Francisco County | ||||||||
Interest rate (4.92%) varies annually (bank rate plus 3.10%) | ||||||||
Monthly payment $2,174 matures September 15, 2032 | ||||||||
Total mortgages payable | $ | 47,027 | $ | 47,293 |
(1) Monthly payments include amounts for various impounds such as property taxes, insurance, and repairs.
(2) Monthly payments based upon a 30 year amortization, with a balloon payment due at maturity.
The future minimum payments of principal on the above mortgages at March 31, 2013 are presented in the following table ($ in thousands).
2013 | $ | 892 | ||
2014 | 1,239 | |||
2015 | 24,393 | |||
2016 | 2,450 | |||
2017 | 12,888 | |||
Thereafter | 5,165 | |||
Total | $ | 47,027 |
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REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 7 – FAIR VALUE |
The company does not record its performing (i.e. non-impaired loans) at fair value on a recurring basis. Impaired loans with a specific reserve are measured at fair value on a non-recurring basis. Loans designated as impaired loans are carried at the lesser of the amount owed or the fair value of the underlying collateral.
The fair value of the performing loans was determined to be equivalent to their book value at March 31, 2013 and December 31, 2012. The fair value was estimated based upon projected cash flows discounted at the estimated current interest rates at which similar loans (with regards to specifics of property type, occupancy and lien position) would be made or are being made by RMC. Given the unique nature of each collateral asset, each borrower’s circumstances, and the sale of mortgage loans underwritten primarily based on the value of the real estate collateral are infrequent and are not usually publicly reported, even within the lending trade associations, the fair value of the loans approximates the carrying value in substantially all cases.
Non-recurring basis
Assets and liabilities measured at fair value on a non-recurring basis are presented in the following table as of March 31, 2013 ($ in thousands).
Fair Value Measurement at Report Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | Total | |||||||||||||
Identical Assets | Inputs | Inputs | as of | |||||||||||||
Item | (Level 1) | (Level 2) | (Level 3) | 03/31/2013 | ||||||||||||
Impaired loans without allowance | $ | — | $ | 9,243 | $ | — | $ | 9,243 | ||||||||
Impaired loans with allowance, net | $ | — | $ | 21,861 | $ | — | $ | 21,861 |
Assets and liabilities measured at fair value on a non-recurring basis are presented in the following table as of December 31, 2012 ($ in thousands).
Fair Value Measurement at Report Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
in Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | Total | |||||||||||||
Identical Assets | Inputs | Inputs | as of | |||||||||||||
Item | (Level 1) | (Level 2) | (Level 3) | 12/31/2012 | ||||||||||||
Impaired loans without allowance | $ | — | $ | 9,611 | $ | — | $ | 9,611 | ||||||||
Impaired loans with allowance, net | $ | — | $ | 21,883 | $ | — | $ | 21,883 | ||||||||
REO held as investment | $ | — | $ | — | $ | 15,259 | $ | 15,259 |
26
REDWOOD MORTGAGE INVESTORS VIII
(A California Limited Partnership)
Notes to Consolidated Financial Statements
March 31, 2013 (unaudited)
NOTE 8 – COMMITMENTS AND CONTINGENCIES, OTHER THAN LOAN AND REO COMMITMENTS
Legal proceedings
In the normal course of business, the partnership may become involved in various legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce the provisions of the deeds of trust, collect the debt owed under the promissory notes, or to protect, or recoup its investment from the real property secured by the deeds of trust and to resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions typically would be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
Commitments
There were no commitments other than those disclosed in Notes 4 and 5.
NOTE 9 – SUBSEQUENT EVENTS
None
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and notes thereto, which are included in Item 1 of this Report, as well as the audited consolidated financial statements and the notes thereto, and “Management Discussion and Analysis of Financial Condition and Results of Operations” included in the partnership’s Annual Report on Form 10-K for the year ended December 31, 2012.
Forward-Looking Statements
Certain statements in this Report on Form 10-Q which are not historical facts may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended, including statements regarding the partnership’s expectations, hopes, intentions, beliefs and strategies regarding the future. Forward-looking statements include statements regarding future interest rates and economic conditions and their effect on the partnership and its assets, trends in the California real estate market, estimates as to the allowance for loan losses, estimates of future limited partner withdrawals, estimated costs to complete certain property developments, additional foreclosures in 2013, expectations regarding the level of loan delinquencies, plans to develop certain properties, beliefs relating to the impact on the partnership from current economic conditions and trends in the financial and credit markets, expectations as to when liquidations will resume, and the use of excess cash flow. Actual results may be materially different from what is projected by such forward-looking statements. Factors that might cause such a difference include unexpected changes in economic conditions and interest rates, the impact of competition and competitive pricing and downturns in the real estate markets in which the partnership has made loans. All forward-looking statements and reasons why results may differ included in this Form 10-Q are made as of the date hereof, and we assume no obligation to update any such forward-looking statement or reason why actual results may differ.
Current Economic Conditions
There have been no significant changes to the economic conditions since the filing of the annual report on Form 10-K for the year ended December 31, 2012.
Critical Accounting Policies
Management estimates
See Note 2 (Summary of Significant Accounting Policies) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of critical accounting policies.
Related Parties
See Note 1 (General) and Note 3 (General Partners and Related Parties) to the financial statements included in Part I, Item 1 of this report for a detailed presentation of various partnership activities for which the general partners and related parties are compensated, and other related-party transactions, including the formation loan.
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Results of Operations
Changes to the partnership’s operating results are presented in the following table ($ in thousands).
Changes during the three months ended March 31, 2013 versus 2012 | ||||||||||
Dollars | Percent | |||||||||
Revenue, net | ||||||||||
Interest income | ||||||||||
Loans | $ | 19 | 6 | % | ||||||
Imputed interest on formation loan | 41 | 79 | ||||||||
Other interest income | (1 | ) | (100 | ) | ||||||
Total interest income | 59 | 16 | ||||||||
Interest expense | ||||||||||
Bank loan, secured | (281 | ) | (100 | ) | ||||||
Mortgages payable | (33 | ) | (6 | ) | ||||||
Amortization of discount on formation loan | 41 | 79 | ||||||||
Other interest expense | (1 | ) | (100 | ) | ||||||
Total interest expense | (274 | ) | (30 | ) | ||||||
Net interest income/(expense) | 333 | (61 | ) | |||||||
Late fees | (4 | ) | (57 | ) | ||||||
Other | (3 | ) | (100 | ) | ||||||
Total revenues, net | 326 | (61 | ) | |||||||
Provision for loan losses | — | — | ||||||||
Operating expenses | ||||||||||
Mortgage servicing fees | (27 | ) | (15 | ) | ||||||
Asset management fees | (34 | ) | (15 | ) | ||||||
Costs from Redwood Mortgage Corp. | 29 | 8 | ||||||||
Professional services | 119 | 36 | ||||||||
REO | ||||||||||
Rental operations, net | (163 | ) | 20 | |||||||
Holding costs | (366 | ) | (85 | ) | ||||||
Loss/(gain) on disposal | 6 | (100 | ) | |||||||
Other | (43 | ) | (91 | ) | ||||||
Total operating expenses, net | (479 | ) | (63 | ) | ||||||
Net income (loss) | $ | 805 | (62 | )% |
Please refer to the above table and the Statement of Operations in the financial statements included in Part I, Item I of this report throughout the discussion of Results of Operations.
Impact of general economic and real estate market conditions on the partnership’s financial condition, results of operations and cash flows
In the second half of 2012 and continuing in the first and second quarters of 2013, we have observed real estate markets begin to show evidence of recovery, particularly in northern California. Loans from traditional sources, such as banks, are of limited availability, and when they are available the credit and regulatory environment imposes constraints such that few projects and/or borrowers meet the new, more stringent minimum requirements to qualify. Multi-family properties that are stabilized and profitable can qualify for Fannie and Freddie loans and institutional financing, but the loan underwriting is restricting. The result is our remaining borrowers are experiencing on-going difficulty in refinancing their partnership loans and/or selling the properties securing those loans to generate cash.
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Revenue – Interest income - Loans
The interest on loans increased for the three months ended March 31, 2013 compared to the same period in 2012 due to a decrease in the amount of foregone interest, offset by a decrease in the average secured loan portfolio balance, and the decrease in the related average yield rate (the partnership has modified many of the performing loans to lower interest rates which reflect current market rates). Foregone interest (not recorded for financial reporting purposes on loans designated non-accrual status) in 2013 and 2012, was approximately $698,000 and $1,149,000, respectively. The table below recaps the quarterly averages and the effect of the foregone interest on the average yield rate ($ in thousands).
Average | Stated | |||||||
Secured | Average | Effective | ||||||
Loan | Yield | Yield | ||||||
Three Months Ended March 31, | Balance | Rate | Rate | |||||
2012 | $ | 71,998 | 8.18 | % | 1.79 | % | ||
2013 | $ | 61,235 | 6.79 | % | 2.23 | % |
Revenue – Interest expense
Bank loan, secured – The bank loan was paid off in September 2012.
Mortgages – The table below recaps the quarterly averages and interest expense ($ in thousands).
Average | Weighted | |||||||
Mortgage | Average | |||||||
Loan | Interest | Interest | ||||||
Three Months Ended March 31, | Balance | Rate | Expense | |||||
2012 | $ | 43,265 | 5.19 | % | $ | 584 | ||
2013 | $ | 47,160 | 4.41 | % | $ | 551 |
Provision for Losses on Loans/Allowance for Loan Losses
The provision for losses on loans is primarily driven by the specific reserves maintained in the allowance for loan losses, associated with impaired loans as analyzed each quarter.
See Notes 4 (Loans) to the financial statements included in Part I, Item 1 of this report for detailed presentations of loan balances, activity, and characteristics, and the corresponding data regarding the allowance for loan losses.
Operating Expenses
Mortgage servicing fees - The decrease for the three months ended March 31, 2013 compared to the same period in 2012 was due to the reduction in the average loan balance (see the table in Revenue – Interest income - Loans).
Asset management fees - The decrease for the three months ended March 31, 2013 compared to the same period in 2012 was due to the reduction in the total assets under management from $265,431,000 as March 31, 2012 to $246,377,000 at March 31, 2013.
Costs from RMC - The increase in costs from RMC for three months ended March 31, 2013 compared to the same period in 2012 was due to reimbursement of qualifying charges permitted in the partnership agreement which before the start of the financial crisis/recession RMC chose not to request reimbursement for all costs qualifying for reimbursement, which it may do from time to time in its sole discretion. In subsequent periods (i.e. 2010 onward) as the fees RMC would otherwise have collected from loan originations and loan servicing fees declined substantially or went to near zero or zero due to the restrictions on lending imposed by the amended and restated loan agreement, RMC chose to request reimbursement for all qualifying costs.
30
Professional services - The increase in professional services for the three months ended March 31, 2013 compared to the same period in 2012 was primarily due to an increase in legal fees of $212,000 principally related to the partnership’s collection and recovery efforts from current and former borrowers, offset by a decrease in auditing and tax services of $39,000 and a decrease in consulting services of $65,000.
REO - Rental operations, net – The increase in rental operations is primarily due to the ongoing efforts to control and reduce costs, including seeking county property tax assessors to lower assessed property values and increasing oversight of property managers.
The table below summarizes the rental operations, net for the three months ended March 31, ($ in thousands).
2013 | 2012 | |||||||
Rental income | $ | 2,791 | $ | 2,918 | ||||
Operating expenses, rentals | ||||||||
Administration and payroll | 346 | 392 | ||||||
Homeowner association fees | 201 | 160 | ||||||
Receiver fees | 46 | 73 | ||||||
Utilities and maintenance | 275 | 327 | ||||||
Advertising and promotions | 31 | 34 | ||||||
Property taxes | 275 | 462 | ||||||
Other | 47 | 93 | ||||||
Total operating expenses, rentals | 1,221 | 1,541 | ||||||
Net operating income | 1,570 | 1,377 | ||||||
Depreciation | 602 | 572 | ||||||
Rental operations, net | $ | 968 | $ | 805 |
Interest expense on the mortgages securing the rental properties was $551,000 and $582,000 for the three months ended March 31, 2013 and 2012, respectively.
Rental operations are comprised of residential and commercial properties. There were 16 residential properties at March 31, 2013 with a net book value of $142,179,000, and three commercial properties with a net book value of $12,299,000. Financial highlights are presented in the table below for the three months ended March 31, 2013, ($ in thousands).
Net | ||||||||||||||||||||
Rental | Operating | Operating | Earnings/ | |||||||||||||||||
Income | Expenses | Income | Depreciation | (Loss) | ||||||||||||||||
Property type | ||||||||||||||||||||
Residential | ||||||||||||||||||||
Single family | $ | 11 | $ | 8 | $ | 3 | $ | 5 | $ | (2 | ) | |||||||||
Condominiums and Apartments | 1,088 | 413 | 675 | 292 | 383 | |||||||||||||||
Fractured condominiums | 1,449 | 684 | 765 | 275 | 490 | |||||||||||||||
Total residential | 2,548 | 1,105 | 1,443 | 572 | 871 | |||||||||||||||
Commercial | 243 | 116 | 127 | 30 | 97 | |||||||||||||||
Total rental operations | $ | 2,791 | $ | 1,221 | $ | 1,570 | $ | 602 | $ | 968 |
During the first quarter of 2013 as compared to the first quarter of 2012, rental income decreased by $127,000 due to the sale of a rental property in the later part of 2012 and a reduction of rents that resulted from the renegotiation of an expired commercial lease. Total operating expenses decreased by $320,000 (21%) with net rental operations increasing by $163,000 (20%). With the real estate portfolio now stabilized and holding approximately at a 94% occupancy level, we continue our drive of the last three years to maintain our properties at high maintenance standards while working to reduce operating costs. Further we continue to seek to push rents to market and possibly slightly above prevailing market averages. We seek to provide outstanding customer service and tenant retention.
31
REO - Holding costs - The decrease in holding costs in the three months ended March 31, 2013 compared to the same period in 2012 was primarily due to the sale of five properties during 2012 (two properties were sold in the 1st quarter, and one in each of the other three quarters).
Liquidity and Capital Resources
The partnership relies upon loan payoffs, borrowers’ mortgage payments, the sale and financing of real estate owned and to a lesser degree, retention of income when profitable for the source of funds for operations, lending and payments to partners.
Contractual Obligations, Commitments, and Contingencies
A summary of the contractual obligations of the partnership as of March 31, 2013 is set forth below ($ in thousands).
Contractual Obligation | Total | Less than 1 Year | 1-3 Years | 3-5 Years | ||||||||||||
Mortgages | $ | 47,027 | $ | 1,197 | $ | 25,427 | $ | 20,403 | ||||||||
Construction contracts | 904 | 904 | — | — | ||||||||||||
Construction loans | — | — | — | — | ||||||||||||
Rehabilitation loans | — | — | — | — | ||||||||||||
Total | $ | 47,931 | $ | 2,101 | $ | 25,427 | $ | 20,403 |
The partnership has one property in San Francisco, California with a carrying value of $5,034,000 in construction with remaining construction costs of approximately $904,000.
Distributions to limited partners
The percent of limited partners electing distribution of allocated net income, if any, by weighted average to total partners’ capital was 56% for the three months ended March 31, 2013 and 2012. In the three months ended March 31, 2013 and 2012, $566,000 and $654,000, respectively, was distributed to limited partners. Should the full year results of operations be a net loss, these amounts distributed would therefore be a return of capital.
Withdrawals of limited partners’ capital
The partnership agreement also allows the limited partners to withdraw their capital account subject to certain limitations and penalties (see “Withdrawal From Partnership” in the Limited Partnership Agreement). In response to reduced cash flows due to reduced loan payoffs, increased loan delinquencies and increased needs for cash reserves necessary to protect and preserve the partnership’s assets, as of March 16, 2009, the partnership suspended all liquidation payments and announced that it would not be accepting new liquidation requests until further notice. Liquidation requests of approximately $2,700,000 remained unfulfilled at March 31, 2013 and liquidations for future periods are suspended until future notice. Liquidation requests submitted to Redwood after March 16, 2009 are not deemed to be accepted, nor do they serve as placeholders for the submitting limited partner.
The partnership is unable to predict when liquidations will resume as it will depend on the ability to collect monies due from borrowers and to dispose of real estate owned, or to receive net rental income from real estate owned, and on the improvement of general economic and capital market conditions and recovery of the real estate market. It is anticipated liquidations will not resume in 2013. For the foreseeable future, the partnership intends to utilize available cash flows to fund its business operations, protect its security interests in properties, make real estate loans, and maintain its real estate owned. It is anticipated liquidation payments will resume only when the partnership’s cash flows improve to levels that enable the partnership to resume lending business operations, provide consistent profitability, and the economy and the real estate and capital markets stabilize and return to normal levels of activity.
32
Valuation of partners’ capital as units
In some cases in order to satisfy broker-dealers and other reporting requirements, the general partners have valued the limited partners’ interest in the partnership on a basis which utilizes a per unit system of calculation, rather than based upon the investors’ capital account. This information has been reported in this manner in order to allow the partnership to integrate with certain software used by the broker-dealers and other reporting entities. In those cases, the partnership will report to broker-dealers, trust companies and others a “reporting” number of units based upon a $1.00 per unit calculation. The number of reporting units provided will be calculated based upon the limited partner’s capital account value divided by $1.00. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The reporting units are solely for broker-dealers requiring such information for their software programs and do not reflect actual units owned by a limited partner or the limited partners’ right or interest in cash flow or any other economic benefit in the partnership. Each investor’s capital account balance is set forth periodically on the partnership account statement provided to investors. The amount of partnership profits each investor is entitled to receive is determined by the ratio each investor’s capital account bears to the total amount of all investor capital accounts then outstanding. The capital account balance of each investor should be included on any FINRA member client account statement in providing a per unit estimated value of the client’s investment in the partnership in accordance with NASD Rule 2340.
While the general partners have set an estimated value for the Units, such determination may not be representative of the ultimate price realized by an investor for such Units upon sale. No public trading market exists for the Units and none is likely to develop. Thus, there is no certainty the Units can be sold at a price equal to the stated value of the capital account. Furthermore, the ability of an investor to liquidate his or her investment is limited subject to certain liquidation rights provided by the partnership, which may include early withdrawal penalties (See the section of the Prospectus entitled “Risk Factors – Purchase of Units is a long term investment”).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not included as the partnership is a smaller reporting company.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The partnership carried out an evaluation, under the supervision and with the participation of the general partners of the effectiveness of the design and operation of the partnership’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the general partners concluded the partnership’s disclosure controls and procedures were effective.
Changes to Internal Control Over Financial Reporting
There have not been any changes in the partnership’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the partnership’s internal control over financial reporting.
33
PART II – OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of business, the partnership may become involved in various types of legal proceedings such as assignment of rents, bankruptcy proceedings, appointment of receivers, unlawful detainers, judicial foreclosure, etc., to enforce provisions of the deeds of trust, collect the debt owed under promissory notes, or to protect, or recoup its investment from real property secured by the deeds of trust and resolve disputes between borrowers, lenders, lien holders and mechanics. None of these actions would typically be of any material importance. As of the date hereof, the partnership is not involved in any legal proceedings other than those that would be considered part of the normal course of business.
ITEM 1A. Risk Factors
Not included as the partnership is a smaller reporting company.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not Applicable.
ITEM 3. Defaults Upon Senior Securities
Not Applicable.
ITEM 4. Mine Safety Disclosures
Not Applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
31.1 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.3 Certification of General Partner pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.3 Certification of General Partner pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
* XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacity indicated on the 15th day of May, 2013.
Signature | Title | Date |
/s/ Michael R. Burwell | ||||
Michael R. Burwell | President, Secretary/Treasurer of Redwood Mortgage Corp. (Principal Financial and Accounting Officer); Director of Redwood Mortgage Corp. | May 15, 2013 |
/s/ Michael R. Burwell | ||||
Michael R. Burwell | Manager of Gymno LLC | May 15, 2013 |
/s/ Michael R. Burwell | ||||
Michael R. Burwell | General Partner | May 15, 2013 |
35